IFS analysis of today’s public finance figures

Today the Office for National Statistics and HM Treasury published Public Sector Finances September 2016. We now have details of central government receipts, central government spending, public sector net investment, borrowing and debt for the first half of financial year 2016−17.

Thomas Pope, a Research Economist at the IFS, said:

"At the half way point in the financial year, tax receipts have disappointed while central government spending has been slightly lower than official forecasts for the year imply. Overall, borrowing looks set to be higher than the OBR forecast in March, possibly by a reasonable margin. The trend so far suggests that, over the year as a whole, receipts could undershoot by £14 billion.

The next few months might however contain some better news on receipts. The recent rise in income tax on dividend income is likely to have led to some owner-managers bringing forward their dividend payments. As a result we can expect strong growth in income tax receipts on dividend payments to arrive around the self-assessment deadline at the end of January. Therefore a better estimate for receipts this year is for an undershoot of £8 billion, driven by with weak receipts from income tax and National Insurance on earnings, and from VAT on purchases.

On November 23rd, the new chancellor will present his response to a much changed economic outlook at the Autumn Statement. Borrowing looks likely to be larger this year than his predecessor expected in March, which will make the challenge he faces more difficult."

Further analysis

Receipts

Extrapolating from the year to date, government receipts are on course to be £14 billion down on the OBR’s forecast from March (see Table). In particular, PAYE, NICs and VAT receipts look set to disappoint, while strong Corporation tax receipts offset this a little. Due to strong expected growth in Self-Assessment receipts (which mostly come in January and February) this year, a better central estimate would be that receipts might miss their forecast by around £8 billion.

This month, and for the year to date, Stamp Duty Land Tax receipts have grown less quickly than the OBR forecast for the year as a whole, likely due to a reduction in property transactions. The OBR highlights a slowdown in high end residential and commercial purchases, particularly in London. On the other hand, stamp duty on shares has been buoyed by the increase in share prices and volatility in the market (which leads to more transactions). These two effects broadly offset one another.

Table: Growth in receipts, spending and borrowing over the year to date

% growth

£ billion

Year-to-date

(outturn data)

Forecast for year as a whole

(OBR, March 2016)

Forecast for 2016–17

(OBR, March 2016)

Implied difference

Central government receipts

3.6%

5.9%

672.6

–14

Of which:

PAYE

1.6%

5.0%

153.4

–5

NICs

7.0%

10.9%

126.5

–5

VAT

2.3%

3.3%

134.8

–1

Corporation tax

3.5%

-2.0%

43.5

+2

Central government spending

1.7%

2.4%

686.7

–5

Total

–8.7%

–23.4%

55.5

+10

Note: PAYE = Pay As You Earn; NICs = National Insurance Contributions; Total growth figures refer to Central government only. Numbers may not sum due to rounding

Spending

Central government spending is running below forecast to the tune of around £5 billion. Broadly, this is explained by reductions in grants to Local Authorities, with their borrowing running ahead of forecast.

The full picture

For the public sector as a whole, a simple extrapolation implies a deficit £17 billion above the OBR forecast. However, some of this is driven by changes in the timing of spending and revenues for local government, which should unwind by March.

For a best estimate of public sector borrowing for the year, we focus on the central government numbers. Here a simple extrapolation implies a £10 billion increase in the deficit compared to forecast. If receipts were to progress as we expect, and spending caught up with the forecast over the next six months, the deficit would be around £8 billion higher than the OBR forecast in March.